"The Deal", Emotion and Markets...

Markets are not nearly as logical as one would expect them to be. The stock market, the commodities market... even the real estate market. Don't get me wrong, the DO move based on logic and reason, and they appear to be very logical... but there is a HUGE component that isn't logical...

There are two emotions at the base that move markets...

Greed

Fear

Those are the base emotions to which markets react. Let me illustrate...

In a euphoric market, greed overcomes fear, and people buy. This creates a bubble. We saw it in tech stocks in the late 1990s and early 2000s. Companies that didn't even have a plan for profitability were being run up because they were being run up. We saw it in housing in the last couple of years. "Houses ALWAYS rise in value", the NAR told us. The most famous example is the Tulip Bubble in Holland in the 17th Century. People were paying "20 times the annual pay of a skilled craftsman" for a tulip contract... not even a tulip.

in all bubbles, someone spoils the party and introduced logic and reason...

"Why should we pay $1000/share for a company that has never shown a plan to actually make money?"

"Why should I pay $600,000 for a tulip contract?"

"Why should you pay $400,000 for a fixer-upper in Braselton that only cost $127,000 to build and was purchased three years ago for $175,000?"

The obvious answer is that logic and reason left the building while people were seeing all of the money they could make. Enter fear.

And again, we have seen this played out before. The price is dropping, everyone is selling and nobody wants to buy. The ball of string is unwinding. We can see it in the tech bust. Companies that WERE making money had their share price crumble because they were "tech-related." the Dow, NASDAQ and S&P300 all saw major declines, much of that in companies that weren't even tech-related.

The "market" was afraid of the possible ramifications. Even explanations with a giant stretch caused further price erosion. It was a mirror image of the run up in prices. Just as anything that could be stretched to seem like a good reason to buy, now anything that could be used to rationalize the fear was used to sell.

We saw it play out with oil in a short period this summer. Back in June, before Goldman-Sachs predicted $250/bbl oil, I was saying it might be a bubble, and that the introduction of fear could cause it to burst. In July, President Bush killed the Executive Order preventing oil drilling on the Outer Continental Shelf. There was still a Congressional ban, but speculators started to fear... prices dropped. We are currently looking at $25/bbl oil. And now there are entities saying that it could go back to $10/bbl... Logic has left the building, and the oil market is in fear mode.

Housing?

There is NO doubt that there was a GIANT bubble in housing. especially out west and in a few areas in the east. And those places also saw 30% and even 40% decreases in value. in some cases, brand new homes were purchased out of the builders bankruptcy for less than it would have cost to build the house... if the land were free. Obviously that isn't a rational price. In some cases, the properties wouldn't even sell at prices that couldn't be duplicated. Fear had taken grip and the pendulum had swung too far in the other direction.

Here in Gwinnett County, near Atlanta, we didn't have the huge run-up in prices. We had an accelerated appreciation, but not to the levels of some of the serious bubble areas. And we have not had the severe decline in values, but there certainly has been a decline. Oddly, the worst hit markets are starting ot move quite well. Phoenix, Southern California and even many places in Florida are posting nice sales increases and the values are coming back to realistic.

Here, and some other markets that didn't have the radical swings (the crash started in those markets) we are lagging behind. We haven't started the positive move yet.

Here is the tip...

The first people to overcome their fear with rational logic are the ones that profit or get the good deals. The ones that wait for the herd are the ones that run with the bulls. And, in the case of a market top, the ones that use rational logic to sell or cut back are the ones that lock their profits.

Now is the time when rational logic is a profitable plan. Not for every property, but for the good ones. I know of a few in various parts of Lilburn and throughout Gwinnett County. I have fellow agents that are tracking deals in other parts of the Atlanta Metro. I have mortgage connections that are hooking people up with great financing.

If you wait for the herd, you get what is left after the first movers pick up the best deals.

Give me a call for a no obligation chat about some of the deals on the market right now.

Great posting Lane. Interesting to see someone clear on the other side of the country (I work in the Hollywood Hills area of Los Angeles) in so many words echoing what I have talking up to clients, prospective clients, colleagues ,etc for the better part of this year. Basically that there is so much psychology in play in the market that homes have to be listed 5-10% under the most recent comps. In other words, price it to get the reaction from buyers (as there still seems to be decent pent-up demand out here), "this house is so well-priced, we can't afford NOT to buy it.!"

This jn turns elicits mutliple-offers (remember those?) which in turn takes the fear-factor off the table for the buyers involved (by validating their buying instincts in gen',l and that specific property in particular). Once that happens, the emotions kick-in (like they used to 2-4 years ago), and it's fasten your seatbelt time.

I have done this with my last three listings which have all sold in multiples in the first week ranging from full price to +10% over asking, blowing past all the overpriced real estate roadkill inventory that's been languishing on the mkt for months. In a nutshell, you are pricing from the "bottom up" rather than from the traditional "top down." IF your market conditions will support it, it works like a charm.

Like Lane says, right now it's all about overcoming the fear factor. Make them an offer they can't refuse

Fear is a huge problem around here. With job losses from the Wall Street crisis just hitting us in the face. I had THREE clients lose their jobs over the past month....and I don't have a lot of clients! My market won't recover for a while. I think buyers are idiots for not taking advantage of the buyer's market. But they aren't doing it. I bought in 1996 for $245k - a house with a huge yard. It lost money until 1998. It's worth close to $700k now. That's how you make money in housing...you buy when everyone else is afraid of "more downside." i'm seeing sales on new construction - FINALLY that are enough to make your heart ache. It took a while for builders in our area to smell the coffee perking, but where they have you are seeing $100k+ cuts in asking prices in townhouses that started were $725k and are down to $600k. People are turning up their noses because they want MORE. Well, we can negotiate, but no one is giving new construction away for $300k! The answer to this pretzel logic that i get is "Prices haven't hit bottom - I want a DEAL." Our market is at a virtual standstill. Not many listings - even fewer buyers. Been this way for three agonizing years. Prices only started dropping the end of last year though.

This market offers excellent opportunities for well informed, rational and realistic buyers who are willing to use their knowledge to take a calculated risk. Having a buyer with these characteristics, along with the financial resources to enter into a transaction is the current challenge, as we all know the buying opportunities are there. I am sure we will look back and say--"Back in 2008 you could have had that home for $X--can you believe what a buy you missed, as our sellers are now telling us "I want you to sell my house for $Y plus, because back in 3004, my neighbor sold their house for $Y in just three days, and my house is so much nicer than theirs!". Hindsight allows us 20/20 vision, but we will only know the best time to buy when it is over. I do think this market offers excellent opportunities for many of my buyers, but the fear emotion, driven mostly by the media, is very strong influence.

Yep, move ahead or get left behind with the pack. Good stuff, we all need to overcome the 'talking heads' to tell consumers the values out there, and the fact there IS money to finance it. Very well put, hope they listen.

Terry - For those back before the shift, there will be excellent returns... For everyone esle, there will be more mixed returns.

Michael - I think that you guys in CA might be a little ahead of us. The boom started there, the bust started there and the recovery is starting there.

Ruthmarie - There is no telling. I've bought stocks for less money that the company had in hard assets (per share of course). I didn't push the price there... and in some cases the price went further down.

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